The death knell for PFI contracts in the UK

This week, the shadow chancellor John McDonnell suggested a future Labour Government would bring PFI contracts in house. Details are sketchy (as always...) but the issue has been extensively covered in the media. Even the FT joined in the chorus with some pieces on the shortfalls of the scheme (here, here and here - all gated). At the very least, this conversation will give pause to potential future investors and make the current ones think twice about their portfolio.

It should not come as a surprise for regular readers that I am staunchly pro-competition and see it (with transparency) as the twin engines that should be setting the course for any public procurement legal regime. Having said that, I never warmed to the whole PFI idea and think, in general, they tend to lead to poor results. These has been my view for the past decade or so.

The reasons for them are two fold. First is asymmetry of information. Once a PFI is in place it is usually followed by the hollowing out of capacity on the public side which soon translates into an absolute inability to monitor the contract properly. Contract monitoring is a perennial problem in procurement, but even more so when it comes down to long standing contracts. In consequence, if and when a contract is re-tendered 10 or even 30 years later the public side will be putting it out without fully knowing what it needs and how it is done. Plus, from a competition perspective the incumbent has an incredible head start over everyone else (same happens with many other contracts though).

Nothing of the above is new, and Jean Tirole built a good part of his career writing about incomplete contracts in the public sector - and there are few contracts less complete than long term public contracts. Aligning interests is hard. Damn hard.

Second, there is also an issue of regulatory/supervision capture. Everyone likes to talk about relationships in public procurement and how we need more of those. I for one, digress and like to see procurement contracts as transactions with a beginning and an end. The cosier the relationship the more likely it is for the supervisor/regulator to not enforce the terms of the contract. No surprise then that we sometimes see former public officials (politicians, aides or civil servants) ending up working for the same firms they were supervising or regulating. It is just human nature.

That is not to say that all PFIs are bad or that all lead to bad results. I have seen them being well used (i.e., with a clear logic and achievable outcomes) for example in the Spanish health sector. But as with so many other procurement 'tools' designed to be used only by those who know how to handle them (competitive dialogue, I am looking at you) the overall score is negative. 

As a conclusion, a point about the World Bank. For the last few years they have been singing the praises of PFI contracts in the developing world. I have been wary about their use even in the UK, where public sector capacity is certainly above average, so I can only shriek in horror thinking how those would be deployed in countries with limited capacity. It doesn't help that when talking with colleagues much more experienced on dealing with those countries, their view is very similar.

 

Links I Liked [Public Procurement]

1. Portuguese Audit Court unimpressed with PFI/PPP hospital (Portuguese only). The Audit Court analysed the first couple of years of the Loures privately managed hospital in Portugal and did not find significant management improvements in comparison with the best publicly managed hospitals. Its management is better than average for the country, but that is pretty much it. (NB: I was involved in a minor capacity as a lawyer on the original tender procedure back in 2004/2005, which was never concluded. I was not involved in the final one.)

2. Conflict of interest in health procurement in Yorkshire. Very interesting. As Albert mentioned on Twitter, if only the Public Contracts Regulations 2015 were applicable to this case... (his comment; my comment). PS: This situation would be dead easy to solve in Portugal...

3. How technology and a small team is changing procurement in the US. Well, not only procurement but Government in general.

4. Sidney adopts e-ink for some traffic signs. Now that is innovation. Well done. Oh, and Sheffield is creating a SmartLab to find new solutions for problems the city have. Now if only they matched the design/development stage with actual procurement...

5. No water cannons for Boris Johnson. At least he did some savvy procurement by getting the water cannons second hand from Germany. They may be useful as mobile fountains during this scorcher Summer we are having...

6. Speaking of Boris...More on the Roastmaster, sorry Routemaster. Great write up by the Guardian on the Routemaster bus. Some great insight about the difficulties of doing procurement of innovation well and how costs can quickly spiral out of control. I am still puzzled by the assumption that the bus could be sold in other markets and if that happened (it did not) it would have an effect on the price TFL would pay for the bus. Wondering what kind of intellectual property agreement exists between TFL and Wrightbus. In any event, there is no innovation without risk. There is no innovation without failure.

Links I Liked [Public Procurement]

1. Are urban developments subject to procurement rules (or at least principles)?

Good case report by Paul Henty. I remember vividly a discussion back in 2007/8 with my then Ph.D supervisor about how come development contracts are not considered relevant for the internal market and as such subject to EU rules? My overarching point is that procurement rules should cover not only the buying strictu sensu but also contracts where money flows the other way around. I posed the same question in 2005 or 2006 to the team then drafting the Portuguese Public Contracts Code (which regulates procurement above and beyond EU requirements) about similar land deals after witnessing first hand some trainwreck examples of horrible practice.

2. PPP trouble dans la France

Again, I remember another discussion (this time in 2009) sponsored by the Commission where PPPs were being bandied around as the best thing since sliced bread. Being a killjoy I argued that they have significant issues such as information asymmetry, regulator capture and the like, problems we saw in Portugal. One of the respondents happened to be the head of the PPP observatory in France who remarked drily that "the Portuguese have no idea how to run PPPs." Oh, well...

3. Should we have Procurement Ombudsmen in Europe like Canada does?

I think so, and have defended it since 2012. In some countries (UK, Ireland) there are not enough legal challenges in procurement, whereas in others (Portugal, Spain), whole court systems have ground to an halt due to an avalanche of procurement related cases.

4. How good (and EU compliant) is the Slovakian procurement law?

Not much it appears, but I will reserve passing judgement until I talk with some local colleagues.